Can Latin America Feed China?

BY LUIS GOMEZ COBO, FELIPE CANALES AND LU JIAJIE

China’s breakneck growth has resulted in rapid urbanization and an insatiable appetite for everything.

Consequently, food security concerns abound, and the Chinese government is implementing initiatives to assure a food supply for its 1.4 billion people. China’s limited arable land and scarce water supply puts pressure on the country to search outside its borders for reliable agricultural sources. Through China’s “Go Outbound” policy, food and agriculture companies are encouraged to participate in international markets. Latin America, with its advantages in the agricultural realm, is well positioned to benefit from this trend. (…)

Supply constraints and an increasingly demanding population intensify food dependencies from abroad. According to the USDA, in the last three decades, barley imports to China increased by more than twenty times. Poultry imports have increased by a factor of ten since 1990. Since 2000, cotton imports increased by 55 times while orange juice imports tripled and meat (beef & veal) imports have more than doubled. Likewise, China turned into a net corn importer and bought around 1.5 million tons from the international markets in 2010. The most apparent example of China’s foreign dependency on food, though, is soybeans. Soybeans are composed of roughly 18 percent oil and 38 percent protein, which means a 60-pound bushel yields about 11 pounds of crude soybean oil and 47 pounds of soybean meal. Thus, soybeans are mainly used for production of edible oil , animal feed, and edible products including soy milk, soy flour, soy protein, and tofu.3 In 1995, China was self-sufficient in soybean supply but that has changed, for meat has become more accessible to the population. China currently produces more than half of the world’s pork, and beef consumption numbers display a clear upward trend. The following graph of soybean consumption versus production is illustrative when trying to understand China’s demand for soybeans. Demand has grown at breakneck growth rates – most vigorously in the last 5 years, since 1998. Between 2005 and 2011, soybean demand nearly doubled to more than 70 million tons per year while production declined 10 percent to 14 million tons. The country’s 58 million ton deficit is by far the largest in the world (Figure 2). Imports that satisfy China’s deficit mostly come from Latin America (Brazil 34 percent; Argentina 20 percent; Uruguay 2 percent) and the US (43 percent)  (…)

EQUITY ACQUISITIONS

While in previous years, the majority of China’s outbound investment has been in the mining and energy sectors, Chinese companies are beginning to snap up agricultural firms, and we believe that in the future this trend will only strengthen. Based on SinoLatin Capital research, 90 percent of outbound deals related to food and agriculture took place in the last six years. (…). Since 2005, at least 26 different Chinese companies (including those from Hong Kong) have acquired stakes in foreign agriculture, food, forestry, fertilizer, and fishery assets. Out of 49 transactions, 80 percent were successfully closed deals. Disclosed deals totaled US$1.4 billion and the average deal size was around US$60 million – half of those equal to or below US$20 million. In Latin America the bulk of the investment went to Peru’s fish industry. Fishmeal is one of the main sources of animal feed, and Peru‘s production accounts for 60 percent of the world total. According to Peruvian news sources, since 2006, China Fisheries has acquired fishery assets totaling US$320 million in five different transactions. Other prominent investments in the region include a vineyard in Chile acquired by COFCO for US$18 million and three Jamaican Sugar mills bought by Complant for US$9 million in Jamaica.

ETHANOL

Ethanol production is a growing industry whose fortunes are tied to the agribusiness sector, and we project alot of growth will take place in this area. China is currently the world’s third largest producer, behind the United States and Brazil, of the petroleum substitute. Unlike the other two countries, however, Chinese ethanol producers are becoming increasingly active in securing future supply. In 2010, Henan Tianguan Group, China’s second largest ethanol producer which is also 40 percent owned by Sinopec, announced its interest in building ethanol plants in Southeast Asia. Also, in 2009, Brazil's State-owned oil and gas conglomerate Petrobras signed a Memorandum of Understanding (MOU) with the Chinese oil giant PetroChina to assess the technical and economic feasibility of launching ethanol production projects in Brazil. Though there has not been any another development with the deal, it is clear that China is looking everywhere to advance its ethanol interests.

LAND ACQUISITION

Foreign land acquisitions by Chinese firms have increased in number and scale. Globally, approximately 56 million hectares worth of large-scale land acquisition deals were announced before the end of 2009. But due to the lack of reliable information it is difficult to fully comprehend this trend. The most recent study on land acquisitions was published in 2010 by the World Bank. According to the report, more than 70 percent of land acquisitions have taken place in Africa, followed by South East Asia and Latin America. The main drivers of these transactions are: demand for food from a growing population and income, demand for biofuel, and a need to shift production to cheaper, land-abundant regions.

Buying land is difficult because there are myriad issues, ranging from political to economic, surrounding the act of acquiring property in a foreign country. In most cases, the countries in which land is acquired need foreign investment. The companies buying land are perceived by the public as invaders, and land acquisitions raise concerns related to environmental and social impact as well as domestic food security. This, however, is just the perception, and we at SinoLatin feel that an acquisition, if done correctly, helps countries by creating new and higher paid salaries, upgrading worker skills, facilitating technology transfer, expanding market reach and improving infrastructure.

Investors carrying out these types of investments are mostly private companies with government support. The Gulf States, China and the Republic of Korea possess the most land outside their own borders. Chinese companies started lease small patches of land for food production in Cuba and Mexico 10 years ago. Now, Chinese companies continue to seek new and larger opportunities to satisfy their population’s dietary demands. In early 2009, The Guardian published an article showing worldwide land acquisition data. According to that research, China has acquired more than 2 million hectares of land from abroad. And that was only until the end of 2008. China’s land acquisition efforts have mainly been focused in South East Asia.

Despite this, however, Latin America is still on China’s map. According to Brazilian government agencies, foreign interests currently own 1.8 million hectares of Brazilian land. As an example of China’s plans for the area, Chongqing Grain Group is going to invest more than US $2.5 billion building out its soybean processing operations in the Brazilian state of Bahia.

Despite a somewhat hostile government policy, Brazil is still a fertile ground for Chinese companies hoping to secure soybean supplies. For example, Chinese companies are to finance a R$7 billion (US$4 billion) soybean operation in the state of Goiás in exchange for an annual supply of 6 million tons of grain.

While Brazil remains one of China’s main locations for South American agricultural investment, Argentina is not far behind. In June 2011 and after roughly 3 years of negotiations, Bloomberg reported that Beidahuang Group, China’s biggest farming company, planned to make a total investment of US$1.5 billion to develop farms in marginal lands and expand a port in the southern State of Rio Negro. According to media, an area of 330,000 hectares is intended to be developed for wine, corn, soybean and vegetable production, helping China feed itself for the next twenty years.

STRATEGIC COOPERATION

Cooperation between China and other nations takes place in a variety of forms, and the Chinese government is very active in using its economic control to further its national interests. In South America, for example, Chinese firms do large amounts of business with Ecuadorean companies, and at the 11th Sino-Ecuadorean summit, eight Chinese companies signed a US$20 million cooperation agreement stating that Chinese companies will import bananas and fish powder from Ecuador. During their stay, the Chinese delegation had members representing entities like Sinochem, COFCO Corporation, the China National Service Corporation and China Agriculture Development Corporation. In addition to signing the above mentioned agreement and a few others, both sides held talks regarding further cooperation with 16 Ecuadorian companies related to agriculture, cacao, coffee, timber, fishery and seafood sectors. Another of China’s biggest South American trading partners is Venezuela, which in August of 2011 commenced the construction of a new agricultural equipment factory on a 26-hectare plot in Anaco, Venezuela. The funding was provided through a Sino-Venezuela fund , and the estimated investment was US$490 million. The plant is to be completed by October 2012 and will provide 1,500 jobs.

Argentina represents a unique opportunity for China because it has a large amount of easily exploitable natural resources, especially in the agricultural sector. In line with Beidahuang’s ongoing deal with the State of Rio Negro in Argentina, the Group is also seeking to cooperate with Argentina’s most prominent agriculture company. In June of 2011, Beidahuang announced that it had signed a cooperation agreement with Cresud, Argentina’s largest soybean producer and one of the most important agriculture companies. Cresud has around 24 farms and controls around 1 million hectares of arable land. According to the media, the Group’s intentions were to establish cooperation’s for the purchase of lands, the rental for equipment for agriculture and logistics mainly in the soybean sector. Beidahuang operates around 2 million hectares of farmland in foreign countries.

Chinese firms have likewise been very active in Brazil. The Brazilian food conglomerate Marfrig Alimentos recently announced the launch of two joint-ventures in China in which the Latin American firm will invest US $300 million to build food distribution and processing capabilities in the Middle Kingdom. Brazilian exporters are tripping over themselves in the rush for access to the Chinese market, and the high growth experienced by South American meat and food-products exporters is expected to continue.

While South America is a region that offers China a simple way to avoid a natural resources problem, the US is still a key trade partner. In fact, in early 2011, ten Chinese companies agreed to the largest soybean purchase agreement in history. The total transaction was worth US$6.7 billion or the equivalent to nearly half of 2010 total trade. A total of 11.5 million tons of soybeans are scheduled for delivery toChina over the next year or so, enough to sate China’s total import needs for two orthree months. The deal was signed with America’s top agriculture companies (Archer Daniels Midland Co, Bunge, Cargill, Zennoh Grain Corp.) as Chinese firms travelled with President Hu Jintao.

Another example of Sino-foreign agribusiness partnership came in September 2010, when China Bright signed an agreement to form a strategic partnership with Japanese Company Mitsui. Under the new partnership, Mitsui would share its business experience and technology, its specialized knowledge in business management, and its global networks to help China Bright become a global company. China Bright in exchange will provide Mitsui with its business experience, infrastructure, networks and access in a wide range of products (upstream to downstream) to expand the company’s business into the Chinese market.

Finally, just recently, on November first of this year, the Australian cotton cooperative

Namoi Cotton entered Heads of Agreement for the proposed establishment of a 50 percent/50 percent joint-venture with China National Cotton Group Corporation to for the procurement and global marketing of Australian bale cotton. The joint-venture is expected to assist Namoi Cotton in mitigating the risks associated with market volatility and liquidity. This agreement is yet another move of the greater trend of Chinese agribusiness companies looking to foreign cooperate with foreign entities to satisfy their local demand.

LATIN AMERICA:  FAVORABLE LAND WITH OPPORTUNITIES

Latin America is the world’s farm. In terms of arable land China has 0.11 hectares per capita, or less than half of the world average. On the other hand, Latin America averages twice as much at (0.25) as China. Argentina and Paraguay have seven times more arable land than China while Brazil, Uruguay, Bolivia, Nicaragua and Cuba have more by a threefold. Mexico and Belize have twice as much.

Land is useless without water, but Latin America is a particularly alluring region for agribusiness because the region holds 34 percent of the world’s total renewable water resources. China only accounts for 5.2 percent of the total share. This figure is more astounding considering that Latin America has less than half the amount of people. In addition, the World Bank places Latin America among the regions with the cleanest water. Every country in South America aside from Jamaica and El Salvador have water so pure that there exists only 0.5 tons of pollutant/km3 of water. On average, water in China has 3.78 tons of pollutant for each cubic kilometer. A clean freshwater supply is crucial for agriculture in a country, for it helps reduce dependency on pump sets, purifiers and irrigation systems--equipment that significantly increases costs.

Latin America is filled with rivers, streams and lakes. It holds three of the world’s ten largest rivers: the Amazon, Orinoco and Parana. China, on the other hand, is home to the world’s second largest river, the Yangtze, which is ten times smaller than the Amazon and seriously affected by pollution. In addition, Latin America is privileged with favorable weather for agricultural

activities.

Latin American agribusiness is mostly centered on an export model, but almost all countries in the region are currently unable to meet global demand due to poor infrastructure. While logistics costs have fallen in the rest of the world, they have risen in Latin America. Studies show that doubling the cost of a country’s transportation reduces trade by up to 80 percent. In Brazil, transportation of certain products costs up to seven times that of other nations. A 2009 survey conducted there found that 76 percent of those polled felt the biggest obstacle to growth was poor infrastructure. With their expertise in managing large infrastructure projects and a voracious appetite for food, we feel Latin America represents a perfect opportunity for Chinese businesses. In addition to fulfilling the government’s desire for businesses to go global, they also secure infrastructure contracts and future food supplies.

CONCLUSION

China is urbanizing in a dramatic fashion. Estimates expect another 300 million people to move to cities by 2025. As a consequence, China will have increase the resources devoted to its “Go Out” policy for food resources. Even though Latin America is on the opposite side of the world and has infrastructure problems, Chinese companies are very active in the region, and are only just beginning to realize the opportunities that await in Latin America.